Economics Questions

Re: Ford worker's buying power - 1914 vs. today

Al_Gore the Idiot — Wed, 05 Oct 2011 19:14:30 GMT

I don't think you can use gold to measure purchasing power. The price of gold back in 1914 was fixed. Today it is traded on the open market. Additionally the dollar is no longer backed by gold. A fair comparison cannot be made. You may get a better comparison by how many oranges, bricks, barrels of oil, etc you could buy with a week's worth of wages.

Re: Ford worker's buying power - 1914 vs. today

JH2011 — Tue, 04 Oct 2011 22:27:19 GMT

The overall point he's trying to make is what he says right after that: "Ford's workers were making $2500/wk, the equivalent; they were paying no federal income taxes, and no payroll taxes, there was no minimum wage and there wer no unions. We paid the highest wages in the world, yet we produced the best quality and the least expensive products. How was that possible? That was because we had the smallest government."

I heard it yesterday when he repeated it on his radio show so i didn't hear that second part. Thanks, that does a much better job of explaining the ultimate point he was trying to make.

I still think the 3 factors in my last post are impossible to measure and separate, and therefore i don't see how someone could try to compare "purchasing power" in two different time periods without a huge margin of error.

Re: Ford worker's buying power - 1914 vs. today

Clayton — Tue, 04 Oct 2011 22:23:09 GMT

It really is an impossible question. Even if we could determine if the standard of living for the average ford worker is lower today than it was in 1914, how could we claim that it is due to inflation and not due their job being less valuable?

It would be a technically daunting task to undergo a thorough economic-historical analysis of the purchasing power of the Ford worker from 1914 to today - perhaps impossible. But the rhetorical point stands just fine. Inflation is absolutely the culprit in the steady devaluation of the purchasing power of savings and income.

The Ford worker, of course, isn't what proves this but makes a great rhetorical illustration of the point. And it's crucial to remember that the devaluation of income purchasing-power relies on the steady, constant expansion of the money supply. If the Federal Reserve stopped printing money tomorrow once and for all, the purchasing power of the Ford worker would equilibrate to its true market price (ignoring the distorting effect of other government regulations for now) in short order.

The only way that income can be devalued is through a steady process of continual inflation. The loss of purchasing power in savings is different... once the purchasing power has been lost, it's lost. But the same is not true of income. This says something very important about the insidiousness of the inflation-industrial complex. It devalues income by design so that employers enjoy lower real wages than would obtain in a free market by deluding workers with ever-devaluing paychecks.

At the company I work for, we are given annual "3% cost-of-living" raises. What a joke! Gas, food, electric, rent are going up by double-digits in a year while my company claims to be keeping me at parity with a 3% raise. But I have a good, professional job... I'm in a much better situation than most Americans, which should give you an idea of just how shitty the whole inflation racket is.

Clayton -

Re: Ford worker's buying power - 1914 vs. today

JH2011 — Tue, 04 Oct 2011 22:21:05 GMT

You can buy less gold for a day of work, but you can also buy a lot more stuff for an ounce of gold.

I think this is getting to what I'm asking. Yes, a Ford worker today receives less gold for a day of work compared to 1914, and yes, that smaller amount of gold is worth more dollars. Maybe those dollars buy you more stuff, maybe they don't. In this case, the net effect of everything involved has enabled a Ford worker today to buy more stuff with those dollars (simply by assuming/observing that a Ford worker today has more stuff than a Ford worker in 1914). But, using the example below, i say that there are a combination of factors at play. And i can't see any logical way to separate each factor and to determine how much of each factor is at play.

Day 1: A Ford worker's wages can buy X goods that enable him to live a standard of living that we call 100.

Day 2: A Ford worker's wages can now buy 1.1X goods that enable him to live a standard of living that we call 110. I see three things that were likely the factors which lead to this net change. 1) He became more productive at his job, and was offered either more "money" or some other benefit. 2) Other people, in other industries, became more productive at their jobs, and made the things which he purchases increase in quality and/or decrease in price. 3) The quantity of money increased and caused him to lose some value in the amount of "money" he was holding and receiving at the time.

In this example, assuming the quanitity of money increased (and assuming that we said the worker's standard of living increased), then #s 1 and 2 had more of a combined positive effect on the Ford worker's standard of living than # 3 had a negative effect on his standard of living (#3 could have went in the other direction. If the quantity of money decreased, his money that he was holding and receiving would have been worth more).

My question is: in reality, how do you separate those 3 things to get an attribution of the change in standard of living?

I would say #3 represents "purchasing power." But if you can't separate #3 from #1 and 2, how can you determine "purchasing power" in one time period versus another?

Re: Ford worker's buying power - 1914 vs. today

Southern — Tue, 04 Oct 2011 21:52:30 GMT

I thought so too, but the population was much lower in 1914, which means each person can claim a lower share of overall goods.

It really is an impossible question. Even if we could determine if the standard of living for the average ford worker is lower today than it was in 1914, how could we claim that it is due to inflation and not due their job being less valuable?

Re: Ford worker's buying power - 1914 vs. today

BiPolarMoment — Tue, 04 Oct 2011 21:48:47 GMT

There is one fairly obvious factor that I haven't seen mentioned: the idea that a "Ford Worker" in both times have parity in relative skill sets or relative value added to know whether the difference in "buying power" (no matter how measured) is relevant.

Re: Ford worker's buying power - 1914 vs. today

John James — Tue, 04 Oct 2011 21:48:06 GMT

For anyone interested, he talked about this in a Congressional hearing here. The topic was brought up starting at about 13:00 in the second video.

The overall point he's trying to make is what he says right after that: "Ford's workers were making $2500/wk, the equivalent; they were paying no federal income taxes, and no payroll taxes, there was no minimum wage and there wer no unions. We paid the highest wages in the world, yet we produced the best quality and the least expensive products. How was that possible? That was because we had the smallest government."

Re: Ford worker's buying power - 1914 vs. today

EmperorNero — Tue, 04 Oct 2011 21:43:31 GMT

I thought so too, but the population was much lower in 1914, which means each person can claim a lower share of overall goods.

Re: Ford worker's buying power - 1914 vs. today

Southern — Tue, 04 Oct 2011 21:35:43 GMT

As mentioned earlier in absolute terms the modern ford worker is far wealthier than the 1914 worker due to technological advances.

But if we assume that 100% income would equal access to 100% of the goods and services in an economy , maybe we look at what each workers salaries would as a percentage of total income (economy wide).

Then we could say that the average worker from then could claim x% of goods and services while the worker from today the claim y% of goods and services.

Im sure there are some problems with this but could it be a better way of comparing the two than trying to adjust for inflation?

Re: Ford worker's buying power - 1914 vs. today

EmperorNero — Tue, 04 Oct 2011 21:00:13 GMT

Have you considered that we had rapid population growth since 1914? I assume that means there is a lot less gold to go around per person now. Unless gold was mined faster than the population grew. Either way, comparing wages in terms of gold says little about purchasing power. You can buy less gold for a day of work, but you can also buy a lot more stuff for an ounce of gold. It's like comparing wages in terms of horses.

Re: Ford worker's buying power - 1914 vs. today

JH2011 — Tue, 04 Oct 2011 18:23:22 GMT

Clearly a lot has changed since 1914 (vaccines, open-heart surgery, international jet travel, Internet, etc.) so it's somewhat meaningless to directly compare purchasing power.

I agree with the bit about things changing, so is any attempt to compare purchasing power worthless?

It is important to emphasize that the calculational aspect of gold has been largely obliterated since the early 20th century in Europe, Britain and the US. This is what makes the comparison more challenging than it otherwise would be.

Sorry, i don't understand. What does this mean?

Re: Ford worker's buying power - 1914 vs. today

JH2011 — Tue, 04 Oct 2011 18:19:30 GMT

Autolykos,

Ok, I see. Let’s go with the 62% increase, which as you point out is the increase in their wages in terms of gold. And of course we cannot simply say that they earned 5000% more wages in terms of dollars because $250 is 50 times greater than $5. Well, we could say it, but what we really care about is how much stuff they could buy with the money in both periods. Which, again, as you say, makes the real question: which is the better indicator of purchasing power, gold or “adjusted” dollars? (we’d also have to consider how they are adjusted).

But how are we defining “purchasing power?” We don’t need to do much more other than think about a Ford worker’s life in 1914 and compare it to a Ford worker’s life today. Clearly the Ford worker today is able to buy more stuff. But the Ford worker today is able to buy more stuff largely because other industries have experienced massive technological innovation and discoveries since 1914, and therefore have created new products, increased the quality of existing products, and brought down the costs of existing products (“cost” meaning real cost – I suppose defined in terms of percentage of one’s income needed for each?) How do you separate a worker’s gain from technological innovation with the worker’s loss from dollars being printed, or similarly, the loss from gold being mined? (I’ve read Rothbard’s What Has Government Done to Our Money, and I think it successfully explains why a free market-determined currency is better than a gov’t-printed currency. But I think Rothbard would agree that, assuming the world used gold as the primary medium of exchange, if a gold mine were found that doubled the quantity of gold, everyone holding gold would be able to trade for approximately half as much stuff as before the mine were found – assuming everyone still wanted to exchange using gold).

But anyway, same question, how could we possibly separate a worker’s gain from technological innovation with the worker’s loss from an increased quantity in whatever is being used as a medium of exchange? Isn’t this the aim of people who compare “purchasing power” in one period to another?

I can understand that we can take the money supply or weight of gold to account for the difference in the quantity of medium of exchange, but how do you control for new & useful products, increased quality of products, and decreased cost of products?

I’m raising more issues than I’m answering. This topic is really confusing.

Re: Ford worker's buying power - 1914 vs. today

Clayton — Tue, 04 Oct 2011 17:41:57 GMT

The argument is rhetorical, not technical. Clearly a lot has changed since 1914 (vaccines, open-heart surgery, international jet travel, Internet, etc. etc.) so that it's somewhat meaningless to directly compare purchasing power. However, fiat money is a spectacularly bad measure of relative purchasing power since the supply of fiat money changes so drastically from year to year. The money supply in 1914 was an infinitesimal fraction of today's money supply, that is, the money supply has been increased anywhere from 100 to 200 times since 1914. There is not 100 to 200 times the amount of gold, silver, copper or even 2x4s today that there was in 1914. So, commodities provide a less bad measure by which to compare relative purchasing power over long periods of time.

It is important to emphasize that the calculational aspect of gold has been largely obliterated since the early 20th century in Europe, Britain and the US. This is what makes the comparison more challenging than it otherwise would be.

Clayton -

Re: Ford worker's buying power - 1914 vs. today

EmperorNero — Tue, 04 Oct 2011 17:31:18 GMT

I would claim in terms of real wealth, like meals and smartphones, a Ford worker is clearly richer today than in 1914. It is intriguing though that he wouldn't be richer in terms of gold. Maybe that's just because gold is so much more expensive these days. Possibly because gold is an investment these days or because of mining capacity. Or gold is expensive because it is measured in Dollars, which are constantly inflated. Then again, it could well be that the average worker has actually become poorer in terms of gold in the last century, because of all the inflation. In a sense inflation shrinks the share of overall gold pie that an hour of work can buy, leaving a bigger share of overall gold to be bid away by the people who print the money. Maybe inflation has been enough to actually make workers poorer in terms of gold.

Re: Ford worker's buying power - 1914 vs. today

Autolykos — Tue, 04 Oct 2011 17:05:08 GMT

The current spot price of gold is $1,621.55 per ounce. So the average Ford worker today, assuming arguendo he earns $250 per day, earns the equivalent of only about 0.77 ounces of gold per week. For him to earn the equivalent of 0.5 ounces of gold per week, the spot price of gold would have to be $2,500.00 per ounce. I don't know why Schiff overstates the gold spot price. In any case, the Ford worker in 1914 would then have earned over 62% ((1.25 - 0.77) / 0.77) more than the average Ford worker today in terms of gold. In terms of dollars, however, the Ford worker in 1914 would have earned about 57% less than the average Ford worker today (source). This, of course, assumes that the official inflation figures are accurate. I guess the question is whether the dollar or the price of gold has been a better indicator of purchasing power between 1914 and today.